Does One Monetary Policy Fit All? The Determinants of Inflation in Emu Countries

32 Pages Posted: 7 Feb 2007 Last revised: 4 Jan 2008

See all articles by Melisso Boschi

Melisso Boschi

Centre for Applied Macroeconomic Analysis (CAMA); Senate of the Republic of Italy

Alessandro Girardi

National Institute of Statistics (ISTAT)

Date Written: 2006

Abstract

This chapter aims at assessing the long-run determinants and the short-run dynamics of inflation in each country belonging to the European Monetary Union (EMU). Our work complements the recent literature on this topic for the Euro Area as a whole. Detecting such determinants can be crucial in designing structural reforms acting as aside instruments of monetary policy in maintaining price stability. The empirical methodology consists of a re-interpretation of the structural cointegrating VAR approach, which allows for a structural long-run analysis of inflation determinants along with an accurate assessment of its short-run dynamics. The main conclusion emerging from the estimates is that not only the determinants of inflation differ in the countries belonging to the Euro Area, but also that cost-push factors have a considerable role in explaining inflation in most of the countries examined. As a policy implication, a tight monetary policy pursued in those countries whose inflation is mainly driven by costs would result in a contraction of economic activity without exerting relevant effects on price dynamics.

Keywords: Inflation, markup, EMU countries, long-run structural VARs, subset VEC models

JEL Classification: C32, E00, E31, E37

Suggested Citation

Boschi, Melisso and Boschi, Melisso and Girardi, Alessandro, Does One Monetary Policy Fit All? The Determinants of Inflation in Emu Countries (2006). Available at SSRN: https://ssrn.com/abstract=961574 or http://dx.doi.org/10.2139/ssrn.961574

Melisso Boschi

Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Senate of the Republic of Italy ( email )

Rome
Italy

Alessandro Girardi (Contact Author)

National Institute of Statistics (ISTAT) ( email )

Via Cesare Balbo 16
00184 Rome, 0185
Italy

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